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Remedy or disappointment?
The National Law Journal
February 21, 2011
he aspiration of home ownership undergirds American society. Until recently, most who attained it could expect to remain in their dwellings as long as they wanted and then sell them at a very substantial profit. But the current economic downturn has turned that dream into a nightmare. Foreclosures, which topped 1 million last year, are projected to rise by 20% in 2011; in 2009, Florida alone had almost 400,000 filings. Housing values have plummeted: Nationally, 23% of residences are "underwater." Unfortunately, the search for remedies has yielded more hype than genuine improvement. In particular, it is doubtful that government-sponsored mediation programs, a growing phenomenon, currently deliver the meaningful results claimed by supporters.
As though the threat of losing one's home were not bad enough, the process of trying to avert that outcome or to negotiate a "graceful exit" has proved daunting in the extreme. Mounting evidence of fraud and forgery led many banks to suspend foreclosures for a time last fall. Yet less headline-grabbing deficiencies in procedure have frustrated owners nearly as much. Stories abound of mortgage debtors needing to submit "lost" paperwork to mortgage servicers multiple times or being shunted from agent to agent on the phone without being able to reach anyone authorized to make a decision. Widespread securitization has cast a cloud of doubt on who has the right to enforce, or alter the terms of, a loan.
Further, even the borrower who finally manages to sit down with a lender's representative rarely achieves much substantive relief. The federal Home Affordable Modification Program (HAMP) was aimed at assisting people in danger of default or already delinquent who owe more than $729,750 and whose mortgage payments comprise more than 31% of their monthly income. Designed to help 3 to 4 million people, HAMP called for reducing interest to a rate as low as 2%; if necessary, extending the loan term to 40 years; and, when required, deferring part of the principal until the loan is paid off. After a three-month trial period, the modifications would supposedly morph into five-year "permanency." But in its initial 18 months, only 500,000 loans were adjusted under its auspices. Often, foreclosure proceedings overtake the HAMP process, or banks impose hefty back payments, penalties or late fees that render the ostensible cure illusory.
Foreclosure-mediation programs, which exist in approximately 20 states, have been touted as one means of addressing the crisis. Of these, only five (including Florida's and New York's) are mandatory; the rest give homeowners a choice whether to use them. Ideally, servicers and mortgagors ought to come to the table with relevant documents and information, ready and willing to consider a whole menu of options. As a first choice, the parties should attempt to agree on changes to terms such as those put forth under HAMP or, even reducing principal, so as to permit the debtor to keep the house. If that is impossible, exit options like cash for keys (paying the debtor to walk away), a short sale, more time or a deed in lieu of foreclosure (the debtor voluntarily deeds the home to the bank) can save both sides the wear and tear of formal proceedings.
How do these programs, in fact, perform? Automatic scheduling produces resolution more often than laissez-faire (although the latter jibes better with mediation's preference for volunteerism). One study found settlement rates of 70% in jurisdictions with mandatory programs. Yet in Florida, a survey reported, mediations led to agreement only about one-third of the time. See Kimberly Miller, "Survey questions program's success," Orlando Sentinel, Jan. 4, 2011. Moreover, even though attendance is supposedly required, only 44% of borrowers could be contacted and, of these, a mere 38% came. The actual rate of settlement, thus, was a paltry 5.7%. Finally, not every deal struck was necessarily good for the debtor since mortgagors generally lack bargaining power. (Plans like New Jersey's — and soon New York's — which furnish counsel to needy homeowners — level the playing field somewhat.)
Knowledgeable observers are skeptical about upbeat statistics; they claim that, without major changes, mediation will not substantially alleviate homeowners' plight. The National Consumer Law Center in September 2009 said "servicer discretion prevails": The programs "often lack mandatory rules and fail to impose sanctions for non compliance with what minimal rules exist." It recommends imposing meaningful duties on banks, backed by penalties, regarding such matters as documentation and disclosure, as well as staying foreclosures "until a mediator or court determines that the servicer has complied in good faith with all participation obligations."
But given a perverse fee structure, which discourages servicers from making modifications benefitting both mortgage holders and borrowers, and the plague of securitization, which effectively prevents real lenders from negotiating with homeowners, such reforms would likely prove marginal. Mediating within a wholly broken system can accomplish no more than the proverbial arranging of deck chairs on the Titanic.